Health Insurance Is an Oxymoron

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George Pennebaker, Pharm.D.

This column discusses my thinking and conclusions regarding the financial management of healthcare. Since the mid 1960s I have pondered healthcare economics and the roles of various healthcare providers and institutions.

This fascinating subject affects each of us in many ways and deeply impacts the health of our country’s economy, as well as its people.

For starters, Health Insurance is an oxymoron.

Insurance covers a loss up to a pre-agreed total amount. Automobile insurance covers up to the total value of your car. Home insurance maxes out at the total value of the home. Life insurance pays out at a pre-agreed amount. Both the insured and the insurer know at the outset what the maximum payout can be. This cannot be done with healthcare, because there is no way to establish a maximum dollar amount. Any maximum dollar amount would just be saying, “After the maximum has been paid, you must suffer and die without relief.” Using insurance principles for the financing of healthcare is not workable. Health insurance is an oxymoron. Yet that oxymoronic method is being used to manage the finances of healthcare in the United States.

The rest of the world’s developed countries have healthcare programs that I would characterize as following the principles of free enterprise more than the programs that exist in the United States. They are single-payer systems. They bargain with the providers. They bargain with the suppliers.

Healthcare in the United States costs more than it does in any other developed country. And it provides “care” that results in the lowest life expectancy in the developed world. A graph of total cost of care versus life expectancy has the rest of the world together in a group. The United States is the one outlier. We spend more money per person than any of the other developed countries. And we die earlier.

Healthcare. Our country creates, develops, perfects, and performs amazingly effective healthcare. We have the talents and the educational and creative assets to do it.

Paying for it. Then we try to pay for it using the oxymoronic health insurance system. The only way health insurance companies can survive is to charge huge premiums* so that they don’t go bankrupt due to an expensive epidemic or a new, expensive life-saving drug.

Price setting. We say we believe in free enterprise. I firmly believe in free enterprise. However, we must remember that the “free enterprise” model is: The provider of the goods or services sits across the table from the purchaser, and they bargain back and forth until an agreed-upon price is determined. As we all know from personal experience and observation, bargaining rarely happens in the pricing of healthcare services and supplies.

Changing provider roles and settings. Which providers do what, and where they do it, is undergoing major changes. Young providers who think they are going to be doing the same things every day for the rest of their career are wrong. What they will be doing in the future will be different and often totally new. The healthcare economic structures must also change to match new systems and new roles. It is well-known that the three biggest hurdles in the development of the Affordable Care Act (aka Obamacare) were hospitals, insurance companies, and drug manufacturers. Each of those politically powerful groups needed to be satisfied with the economics of the ACA. The solutions were: 1. Hospitals had their reimbursement rates upgraded; 2. Insurance companies could still stay in business and collect percentages of the action; and 3. Drug manufacturers received price protection (being able to set the price wherever they desire). Did you notice the lack of free enterprise principles? It is notable that other affected entities didn’t get into the fray as vigorously. None of them were or are as big politically and financially. Physicians, pharmacists, nurses, and other providers of hands-on care were not powerful enough to weigh in.

Hospitals are primarily nonprofit organizations. It is important that the nonprofit ethics be monitored.

Health insurance companies are expensive, profit-making money passers. As mentioned above, the premiums must be high. They also make money by inhibiting the use of costly services and products.

Drug manufacturers provide a necessary component of healthcare. However, the way they set prices is problematic. And those prices are difficult to contest in the current system. Just about every day there is a news story about high drug prices. One can see how distorted drug prices are by glancing at a couple of things: 1. The federal government gets huge discounts on the prices it pays for drugs it dispenses directly to patients by using free enterprise bargaining with the manufacturers; and 2. California’s Medicaid program gets billions of dollars in rebates from drug manufacturers every year. (Secret negotiations: “How big of a rebate will you give us if we put your drug, instead of the other company’s, on the list of contract drugs?”)

The United States is paying more for drugs than is paid by any other developed country. I call it “hidden foreign aid.” Our high prices are making up for their low prices.

Those federal contracts and California’s rebates are created using free enterprise principles. The buyers and sellers are sitting at the same table, bargaining.

Other than the two exceptions above, the United States is paying more for drugs than is paid by any other developed country. I call it “hidden foreign aid.” Our high prices are making up for their low prices.

The rest of the world’s developed countries have healthcare programs that I would characterize as following the principles of free enterprise more than the programs that exist in the United States. They are single-payer systems. They bargain with the providers. They bargain with the suppliers. One of the reasons these single-payer systems work is that they adhere to free enterprise principles. Another reason is that the expensive use of insurance companies is eliminated.

Your comments and thoughts are appreciated.

*Premiums. It has always bothered me that this word is used to describe three such very different things: the “one free with a dozen” premium; the higher price paid for a “premium” product; and the premium that you pay for insurance. Maybe it’s a one-word oxymoron. CT

George Pennebaker, Pharm.D., is a consultant and past president of the California Pharmacists Association. The author can be reached at george.pennebaker@sbcglobal.net; 916/501-6541; and PO Box 25, Esparto, CA 95627.